State supreme court deems sweepstakes illegal – for now

The fate of Internet sweepstakes games appears to be sealed following a unanimous decision by the N.C. Supreme Court declaring a 2010 state law that bans the games as constitutional.

The ruling makes no concessions or provisions for Internet sweepstakes games already in operation, meaning that when the court opinion takes effect Jan. 3, existing games will be illegal.

It also could be the final salvo in a battle between the state and the gaming industry that began in 2006, when video poker and other types of electronic games were banned in North Carolina.

Back-and-forth battle

The gaming industry responded with Internet sweepstakes games, which had a similar interface, similar odds and payouts, but were technically not gambling. The state responded by banning games that simulate video poker and slots games in 2008.

The gaming industry switched to different types of video games to reveal sweepstakes winners that don’t simulate such games, prompting the legislature to ban all Internet sweepstakes games that use an “entertaining display” to reveal winning entries.

The back-and-forth continued until March of this year, when an appeals court found that operating Internet sweepstakes games amounted to an exercise of free speech, making the games legal. The Supreme Court decision this week reversed that ruling, finding that the 2010 law regulates conduct, not speech, and as such is constitutional.

In the north Mecklenburg County area, the impact of the decision will be relatively minor. There are no Internet sweepstakes parlors in Huntersville, Cornelius, or Davidson. Huntersville amended its zoning ordinance in August as a preemptive measure against the Internet sweepstakes parlors that were popping up in places like Mooresville and Denver. While the town couldn’t outright ban the parlors, the amendment placed restrictions on where and when such businesses could operate. Cornelius and Davidson discussed similar legislation, but ended up waiting to see how the Supreme Court would rule.

Some small businesses – mainly gas stations – do have small numbers of Internet sweepstakes games inside, but the overall presence of the games in the area is minor.

“Our community doesn’t have the same exposure as smaller towns and more rural areas where (Internet sweepstakes parlors) are popping up everywhere,” Huntersville Town Manager Greg Ferguson said. He added that the police department will begin determining how many sweepstakes games are installed in town before the law takes effect, although what action would be taken at that point is still up in the air.

“We’re going to wait and see what the response and recommendation from the state is,” Ferguson said. “We’re pretty much certain there’s going to be an attempt to go around or through (via an appeal) this ruling. This is a business that is obviously making someone a lot of money.”

Sweepstakes vs. gambling

The difference between gambling and sweepstakes is subtle. With gambling, you pay to play. Not necessarily so with sweepstakes. Internet sweepstakes operators have said that they don’t sell sweepstakes entries, but rather Internet time, and give “free” sweepstakes entries to customers each time they bought more time. Customers could then use that Internet time to access the sweepstakes site via onsite computers—and only via onsite computers—to find out if they had won.

But the notion that Internet time is really what’s being sold doesn’t stand up to scrutiny. In its decision, the N.C. Supreme Court noted testimony in a similar case in Texas where, in a single week, less than $100 out of nearly $28,000 in Internet time sold was actually used.

Down but not out

Despite the ruling, this is not likely the last the courts will hear from the gaming industry.

Unlike rulings in similar cases in other states, including Texas and Pennsylvania, the N.C. Supreme Court did not find that Internet sweepstakes games constitute gambling, which potentially muddles the discussion.

Without that determination, which would have made Internet sweepstakes games illegal in any case, the gaming industry still has some wiggle room.

The law doesn’t prohibit sweepstakes games, it “bans the operation of electronic machines that conduct sweepstakes through the use of an ‘entertaining display,’” according to the Supreme Court decision. If the Internet sweepstakes software is updated to reveal sweepstakes results without an entertaining display, then the games are within the letter of the law.

Because the court ruled on the constitutionality of Internet sweepstakes games – specifically whether operating such games constitutes free speech – the plaintiffs in the case, Hest Technologies Inc. and International Internet Industries LLC, could also appeal to the U.S. Supreme Court.

Games of Chance, Sweepstakes, and Gambling

On their face, sweepstakes and games of chance seem the same. They can be set up to have identical odds. The difference, though subtle, can be described like so: imagine a six-sided dice. Roll a six, and you win. Anything else, you lose. Your odds of winning are one in six.

An analogous sweepstakes game would involve six entries, one of which is a predetermined winner. Again, your odds of winning are one in six.

The difference is that the roll of a dice is random. Statistically the probability of a six being rolled is one-in-six, but that doesn’t mean a six will come up. You aren’t guaranteed a win every six rolls. But with sweepstakes, it is guaranteed that one of the six entries is a winner, and this is something that can be verified.

The other is that a sweepstakes entry is something that can be verified – each player, whether a winner or loser, is issued a ticket, real or virtual, and so it is possible to ensure that the game is played fairly. This isn’t the case with a roll of the dice: you bet, you win or you lose, money is won or lost, and you roll again. There’s no trail to ensure that roughly one out of six rolls result in a winner over time. Put another way, it’s too easy for a seedy game operator to hand you a loaded dice, fixing the odds much more is his favor.

The difference between gambling and sweepstakes is likewise subtle. With gambling, you pay to play. Not so with sweepstakes. At least, not exactly, and not necessarily. A sweepstakes operator can’t charge you to enter. What he can do is offer sweepstakes entries for free—if you buy something first. The more you buy, the more entries you get, the better your chances of winning.

Internet sweepstakes operators claimed that they weren’t selling sweepstakes entries, but rather Internet time, and gave “free” sweepstakes entries to customers each time they bought more time. Customers could then use that Internet time to access the sweepstakes site via onsite computers – and only via onsite computers – to find out if they had won.

But the notion that Internet time is really what’s being sold doesn’t stand up to scrutiny. In its decision, the NC Supreme Court noted testimony in a similar case in Texas where, in a single week, less than $100 out of nearly $28,000 in Internet time sold was actually used.